Yearly Archives: 2012

SEC Dismissal of “Failure to Supervise” Proceeding

Posted by Giovanni P. Prezioso, Cleary Gottlieb Steen & Hamilton LLP, on
Saturday, February 25, 2012
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Giovanni Prezioso is a partner focusing on securities and corporate law matters at Cleary Gottlieb Steen & Hamilton LLP, and former General Counsel of the Securities and Exchange Commission. This post is based on a Cleary Gottlieb memorandum.

In a significant case for legal and compliance professionals at securities firms, the Securities and Exchange Commission (the “Commission”) recently dismissed enforcement proceedings against Theodore W. Urban, former General Counsel of Ferris, Baker Watts, Inc. (“FBW”). [1] The dismissal of the proceedings, by an evenly divided Commission, rendered “of no effect” a prior administrative law judge decision that had raised widespread industry concerns because of its broad construction of the circumstances in which a legal or compliance professional could be deemed a “supervisor.” [2]

The Division of Enforcement, in proceedings commenced in 2009, alleged that Mr. Urban (i) had been the supervisor of an FBW employee, Stephen Glantz, who allegedly engaged in violations of the securities laws, and (ii) had “failed reasonably to supervise” Mr. Glantz under both Section 15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Section 203(f) of the Investment Advisers Act of 1940 (the “Advisers Act”). [3] The Commission’s chief administrative law judge determined, in her Initial Decision in the matter, that Mr. Urban should be viewed as Mr. Glantz’s “supervisor,” even though Mr. Glantz was not a member of any department reporting to Mr. Urban, but she dismissed the Division’s petition on the grounds that Mr. Urban had reasonably discharged his duties as a supervisor. [4]

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Registration of Investment Advisory Affiliates

Posted by Paul N. Roth, Schulte Roth & Zabel LLP, on
Friday, February 24, 2012
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Paul N. Roth is a founding partner of Schulte Roth & Zabel LLP and chair of the firm’s Investment Management Group. This post is based on a Schulte Roth & Zabel Client Alert by Mr. Roth, Marc E. Elovitz, and Brad L. Caswell.

On Jan, 18, 2012, the SEC’s Division of Investment Management issued a no-action letter [1] permitting registered advisers to private funds (“filing advisers”) to include general partners and similar SPVs of their affiliated funds on the filing adviser’s Form ADV. In addition, U.S. filing advisers who have affiliated investment advisory firms which are controlled by, or under common control with, the filing adviser, may include such affiliates (“relying advisers”) on their Form ADV, when they are considered part of a single advisory business. The staff set forth certain circumstances where a single advisory business would exist, absent facts suggesting otherwise. This Alert focuses on the practical implications for our clients of the Staff’s no-action letter.

Fund General Partners, Managing Members and Similar SPVs

Fund general partners, managing members and other similar SPVs generally do not need to separately register provided that the SPV, its employees and persons acting on its behalf are subject to supervision and control by the registered adviser, and therefore are “persons associated with” the registered adviser. This position applies to registered advisers with single or multiple SPVs. An SPV with independent directors may also rely on this position provided that those independent directors are the only persons acting on the SPV’s behalf that the registered adviser does not supervise and control.

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It Pays to Follow the Leader

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, February 24, 2012
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The following post comes to us from Amy Dittmar and Di Li of the Department of Finance at the University of Michigan, and Amrita Nain of the Department of Finance at the University of Iowa.

Financial bidders like private equity firms often compete with corporate bidders for the same target. Over the last 27 years, financial sponsors made 23 percent of all competing bids. In our paper, It Pays to Follow the Leader: Acquiring Targets Picked by Private Equity, forthcoming in the Journal of Financial and Quantitative Analysis, we examine how the presence of financial sponsor competition affects corporate buyers. Financial bidders are considered experts in the business of identifying undervalued targets. Gains from acquiring an undervalued firm pursued by private equity may accrue to any winning bidder that pays a similar premium for the target. Moreover, existing research shows that financial bidders have lower average valuations than strategic bidders. Thus, a corporate acquirer competing with a financial bidder (which is typically private) may win the auction at a lower premium than when it competes with another public corporate firm.

We find that corporate acquirers who purchase targets that are sought after by financial buyers outperform corporate acquirers who buy targets bid on by corporate firms only or those without competition. These results are robust to alternative measures of acquirer performance and different performance windows. A battery of tests shows that deal characteristics, acquirer abilities, and observable target characteristics cannot explain this difference in returns.

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Transforming Executive Pay in the UK

Posted by John F. Olson, Gibson, Dunn & Crutcher LLP and Georgetown Law Center, on
Thursday, February 23, 2012
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John Olson is a founding partner of Gibson, Dunn & Crutcher’s Washington, D.C. office and a visiting professor at the Georgetown Law Center. This post is based on a Gibson Dunn alert by Selina S. Sagayam, James A. Cox, and Leila Greer-Stapleton. Work from the Program on Corporate Governance about executive compensation includes the book Pay without Performance and the article Paying for Long-Term Performance, both by Bebchuk and Fried.

The Business Secretary of the British government (“Government”), Vince Cable, recently announced a package of controversial plans in a bid to transform UK executive pay culture [1]. Under a new-four-pronged approach, shareholders would for the first time be given a binding vote on executive pay packages. Executive boards may also need to become more diverse — including at least two individuals that had not previously been on a board of directors, and people from a broader range of professional backgrounds.

The Government is to finalize the detail of these plans soon. Mr. Cable was careful to admit that “no proposal on its own is a magic bullet”. There is however real concern that in the quest for the perfect alignment between pay and performance, the seemingly scatter gun approach taken by the coalition government has failed to hit the mark. This alert provides an overview of the proposals, and looks at some of the questions and concerns that they have raised.

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LLC Controlling Member Fiduciary Liabilities

Posted by Chancellor William B. Chandler III, Wilson Sonsini Goodrich & Rosati, on
Thursday, February 23, 2012
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Chancellor William Chandler is a partner at Wilson Sonsini Goodrich & Rosati, and former Chancellor of the Delaware Court of Chancery. This post is based on a WSGR Alert by Chancellor Chandler and Ryan McLeod. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

Last month, the Delaware Court of Chancery issued an important post-trial decision that held the majority and managing member of an LLC liable for breaches of fiduciary duty in connection with the member’s management and eventual purchase of the company. The opinion unequivocally shows that the Court of Chancery considers Delaware’s LLC Act to impose default fiduciary obligations analogous to those in the corporate context absent a clear expression otherwise in the LLC agreement.

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Lessons Learned: The Inaugural Year of Say-on-Pay

Posted by Anne Sheehan, California State Teachers' Retirement System, on
Wednesday, February 22, 2012
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Anne Sheehan is Director of Corporate Governance at the California State Teachers’ Retirement System.

One thing is for certain: Pay is unique at every company. There are as many iterations of pay as there are companies in America. This uniqueness makes our job as shareholders very challenging. For the most part, we must rely on the members of compensation committees to develop the compensation philosophy and structure in order to incentivize management and align their interests with those of shareholders. We believe that poorly structured pay packages harm shareholder value by unfairly enriching executives at the expense of owners – the shareholders. On the other hand, a well aligned compensation package motivates executives to perform at their best. This benefits all shareholders.

There have been many changes this proxy season and although the evaluation of compensation is still a challenge, we have learned a few things along the way. Given the unique nature of compensation, CalSTRS tried to evaluate pay holistically at every company. We not only looked at the alignment between pay practices and the performance of the companies, but also corporate peer groups, problematic pay practices, and disclosures.

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Spin-offs and Reverse Morris Trusts

Posted by Daniel E. Wolf, Kirkland & Ellis LLP, on
Wednesday, February 22, 2012
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Daniel Wolf is a partner at Kirkland & Ellis LLP focusing on mergers and acquisitions. This post is based on a Kirkland & Ellis M&A Update by Mr. Wolf, Sara B. Zablotney, and David B. Feirstein.

Even with the recent slowdown in M&A activity, spin-offs have been among the transactions of choice in the past year. With everyone from economic mainstays like ConocoPhillips and Kraft to high-profile new players like TripAdvisor engaging in separation deals in the latest round of deconsolidation, it is an opportune time for dealmakers to consider the general implications of a spin-off on transformational corporate merger activity and certain structures that may allow for a combination of the two.

Corporations engage in spin-offs for a variety of business and financial reasons. A corporation’s goals can be accomplished without U.S. federal income tax to the distributing corporation and its stockholders so long as the transaction meets the requirements of Section 355 of the Internal Revenue Code.

Failure to meet these requirements either before or after the transaction can cause a spin-off to be taxable to the distributing parent company (in the form of corporate- level gain generally equal to the appreciated value of the spun-off subsidiary), to the distributing parent’s stockholders (in the form of dividend income equal to the value of the spun-off business), or both. These taxes can be prohibitively or even catastrophically expensive.

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Ownership Dynamics with Large Shareholders

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, February 22, 2012
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The following post comes to us from Marcelo Donelli and Borja Larrain, both of the Universidad Catolica de Chile, and Francisco Urzua of the Department of Finance at Tilburg University.

In our paper Ownership Dynamics with Large Shareholders: an Empirical Analysis, forthcoming in the Journal of Financial and Quantitative Analysis, we study ownership dynamics in a country where controlling shareholders are prevalent. We find that ownership structures are very persistent and that pyramidal structures are associated with less dispersion than other control structures. We also find that dilution is preceded by higher returns and predicts low returns in the future, which is a typical feature of market timing.

It is an established fact that ownership is typically dispersed in the US and the UK, but concentrated in the rest of the world. Yet, why is it that markets do not converge to the dispersed ownership paradigm of the US/UK? Why is it that approximately 20% of firms in the US and UK are tightly controlled, whereas 70% of firms in Continental Europe are tightly controlled? What prevents controlling shareholders from diluting their stakes in the firms they control? We aim to provide an answer to these questions by examining Chilean firms’ ownership dynamics in a 20 year period (1990-2009). We benefit from Chile’s unique features, such as improvements in the protection to minority shareholders, economy’s steep growth (per capita GDP more than doubled in PPP terms), markets’ booms and busts, and excellent data sources. Despite these unique features, what we learn sheds light on ownership dynamics in a number of different markets, as Chile is similar to other developed and emerging economies in terms of financial development, the overall level of ownership concentration, and protection to minority shareholders.

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Bebchuk Wins Debate about the Contribution of Executive Pay to the Financial Crisis

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Tuesday, February 21, 2012
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Over the past two weeks, Lucian Bebchuk and René Stulz engaged in an online debate on the question: Has Executive Compensation Contributed to the Financial Crisis? Bebchuk supported a “yes” answer, and Stulz argued for a “no” answer. The debate, which was hosted by the World Bank’s All about Finance blog, was followed by a poll in which readers cast their votes. The votes are now in, and 79.9% of the votes were cast in support of the position supported by Bebchuk.

The opening statements by Bebchuk and Stulz are available here and here. The second-round responses by Bebchuk and Stulz are available here and here. The results of the readers’ poll are available here.

Quasi-Appraisal: The Unexplored Frontier of Stockholder Litigation?

Posted by Scott Hirst, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Tuesday, February 21, 2012
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The following post comes to us from Robert B. Schumer, chair of the Corporate Department at Paul, Weiss, Rifkind, Wharton & Garrison LLP, and is based on an article published in the M&A Journal by Mr. Schumer, Stephen P. Lamb, Justin G. Hamill, and Joseph L. Christensen; the article, including footnotes, is available here.

For buyers of public companies, an obscure but increasingly evident judicial remedy known as “quasi-appraisal” is fast becoming a source of concern. Quasi-appraisal – as its name suggests – is not quite what parties expect from M&A litigation and has the capacity to upset the familiar process accompanying the sale of a public company.

There are three primary types of M&A litigation: Pre-closing disclosure litigation, post-closing loyalty litigation and appraisal. Not every litigation fits neatly into one of these categories, but most do. Pre-closing disclosure litigation often culminates in the plaintiffs, the target company and the buyer agreeing to additional disclosures (and occasionally revisions in the transaction terms) in exchange for a class-wide release and a court-approved award of plaintiffs’ fees. In the absence of a pre-closing disclosure settlement, the second type of litigation may arise which is post-closing, class-action litigation alleging breaches of fiduciary duties (other than disclosure). Most often, such post-closing actions relate to transactions subject to entire fairness review, as, for example, when a controlling stockholder is involved. And finally, in cash-out mergers, stockholders can pursue a post-closing appraisal claim, a remedy that requires each individual stockholder wishing to pursue appraisal to dissent from the merger vote, refrain from accepting the merger consideration, and bear litigation costs. In an appraisal, dissenting stockholders also bear the risk that the court will appraise the stockholder’s shares at a lower value than the merger consideration.

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